Why do founders of substantial fortunes like Branson, the Bamfords, Thyssen and the Kaisers put their wealth in a wealth structure? In its simplest form, just as a trade is invariably operated through a company for the advantage of limited liability, and a non-UK domiciliary owns offshore assets through an offshore trust for tax reasons, so the very wealthy invariably set up structures to preserve their wealth for future generations through the establishment of some new-fangled trust or foundation.
If the intention of the founder, in setting up a structure, is to preserve the family business or wealth for future generations, the founder should be aware that without considerable care family conflict could inflict far greater damage on his wealth than tax. Just as divorce can significantly diminish wealth during an individual’s lifetime, family conflict can similarly damage wealth after the founder’s death.
Family governance is the term used for the planning which a family can put in place to avoid such conflict damaging the family wealth. It does not, necessarily prevent family conflict, although in some cases it can minimise this as well.
Not all practitioners are experts in family governance. Many believe all that is necessary to achieve this objective is to form a trust, which they believe is sufficient to minimise any family conflict damaging family wealth. Trustees have a fiduciary duty to act in the best interests of the beneficiaries and therefore the practitioner relies on this.
In practice however, there are very different views as to exactly what is in the best interests of the beneficiaries: distribute or reinvest, sell the family trading company or maintain ownership within the family? A settlor who sets out his wishes on his death must realise that since this letter is not binding it may be ignored in the face of a serious family dispute or conflict.
Many founders of substantial fortunes are benevolent dictators, and like to think of the trust as a legal concept to perpetuate their wishes after their death. The trustees, although they must disclose certain information to beneficiaries, such as the decisions taken, need not disclose the reasons behind the decisions. Furthermore, the trustees are not accountable to the beneficiaries with regard to their office.
If the trustees hold office personally, they are accountable to the extent of their personal wealth if they are in breach. However, if the trustee is a limited liability company and the trust deed exonerates the trustee from most liability, this method of accountability has minimal bite. Furthermore the lack of reporting and accountability can in certain circumstances lead to frustration, distrust and inevitable conflict among the beneficiaries.
Family governance is a branch of law which aims to reduce the likelihood of family conflict damaging the family wealth. To be effective it needs to introduce a process which provides for an effective reporting by the trustees to the beneficiaries in the same way that company directors must report to their shareholders. It also needs to create a forum for discussion to ensure that the interests of the beneficiaries are properly communicated to the trustees, so that the trustees can decide what is in their best interests given the interests of all the beneficiaries.
Also, the aims and objectives of the trustees must be properly communicated to the beneficiaries, and the trustees must be accountable and removable from office in certain circumstances, especially if they are not personally liable. Finally, there needs to be a balance of power across the wealth structures and in the wealth structures, similar to that encouraged in the corporate sector, as well as protection for minorities and dispute resolution.
To implement family governance through the wealth structure, the family must first have a clear understanding of what it wishes to do and who is to achieve it. It must then be very clear as to the tax consequences and the succession difficulties to be overcome. There has been very little time in Parliament devoted to the harmonisation of succession laws and with cross-border estates some of the difficulties can be surprising.
The structure so established must then be adapted so that it becomes dependent on a process rather than specific people to achieve the family’s objectives. If a private trustee company or an investment management company is used, the appointment and removal of its directors must be reviewed carefully. This could be subject to a shareholders’ agreement or a purpose trust with those rights reserved to an enforcer.
The procedure for family meetings, the investment policy, and the distribution policy can be incorporated into the trust deed, or if it is to be for guidance only then it can be set out in a governance paper, which can be a single document by which all trusts are guided. Whether the terms are to be set out in a family governance statement or the trust deed, will depend upon tax consequences, disclosure and whether the document is to be for guidance or an obligation.